<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended April 30, 1998 Commission File No. 0-14234
KINGS ROAD ENTERTAINMENT, INC.
(Name of small business issuer in its charter)
Delaware 95-3587522
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1901 Avenue of the Stars, Suite 1545
Los Angeles, California 90067
(Address of principal executive office)
Issuer's telephone number: (310) 552-0057
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.01
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $1.7 million.
As of July 20, 1998, the aggregate market value of the voting stock held by
non-affiliates (based on the closing sales price as reported by NASDAQ) was
approximately $1,528,000 (assuming all officers and directors are deemed
affiliates for this purpose).
As of July 20, 1998 the registrant had 1,911,748 shares of its common stock
outstanding.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: YES [ ] NO [X]
<PAGE> 2
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Kings Road Entertainment, Inc. ("Company" or "Registrant"), incorporated
in Delaware in 1980, has been engaged primarily in the development, financing
and production of motion pictures for subsequent distribution in theaters, to
pay, network and syndicated television, on home video, and in other ancillary
media in the United States (the domestic market) and all other countries and
territories of the world (the international market). The Company began active
operations in January 1983 and released its first motion picture in 1984, All of
Me, starring Steve Martin. Seventeen additional pictures have since been
theatrically released in the domestic market and six pictures have been released
directly to the domestic home video or pay television market.
RECENT EVENTS
During the fiscal year ended April 30, 1998, the Company did not produce
any new films and derived revenues almost exclusively from the exploitation of
films produced in prior fiscal years. Following the death on October 4, 1996 of
Mr. Stephen Friedman, then Chairman of the Board of Directors and Chief
Executive Officer of the Company, the Company has explored various business
options including, among other things, the liquidation of the Company, the sale
of the Company as a going concern to an outside party, the sale of substantially
all of the assets of the Company to an outside party and the issuance of shares
of common stock to an outside party which would provide a new source of
financing for the Company. The implementation of any of such options could
result in a material alteration in the Company's business strategy, and the
following discussion of the Company's business in prior years under the captions
"Development," "Financing," "Production" and "Distribution" should be read in
conjunction with the discussion of the Company's strategic plans. (SEE "ITEM 6.
- - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF
OPERATIONS").
DEVELOPMENT
The Company allocates a significant portion of the time and energy of
its staff to search for potentially viable motion picture material and the
development of screenplays. At any given time, the Company has been developing
between approximately five and fifteen motion picture scripts or ideas for
possible future production. During fiscal years 1998 and 1997, the Company spent
approximately $96,000 and $132,000, respectively, on development activities.
Subject to its overall strategic direction, the Company expects to increase its
expenditures on development activities, including the purchase of books and
screenplays, and anticipates that it will spend between $100,000 and $250,000
each year in the future on such activities. Although many of the projects that
the Company develops are subsequently abandoned, the Company believes that these
expenditures are necessary if the Company is to obtain projects that will
attract third party financing and subsequently achieve commercial success.
FINANCING
The Company's strategy has been to fully finance its pictures by
obtaining advances and guarantees from the licensing of distribution rights in
its pictures and other investments from third parties. Once fully financed, the
Company would primarily earn fees for its development and production services
plus contingent compensation based on the success of a film. If
2
<PAGE> 3
necessary, the Company may finance a portion of the cost of a film using
internally generated capital or debt financing.
PRODUCTION
Once fully financed, the Company attempts to produce its pictures at the
lowest possible cost consistent with the quality that it seeks to achieve. The
Company avoids the substantial overhead of major studios by maintaining only a
small permanent staff and by renting production facilities and engaging
production staff only as required. The Company generally produces pictures that
have a cost of production between $1,000,000 and $10,000,000 and which it
believes cannot significantly exceed their budgeted cost. Although the Company's
past production experience allows it certain control over production costs,
production costs of motion pictures as an industry trend have substantially
escalated in recent years.
As of April 30, 1998, the Company has produced (or co-produced)
twenty-five pictures, eighteen of which were theatrically released in the
domestic market and seven of which were released directly to video or pay
television in the domestic market, as follows:
<TABLE>
<CAPTION>
TITLE PRINCIPAL CAST RELEASE DATE
----- -------------- ------------
<S> <C> <C>
All of Me Steve Martin, Lily Tomlin September 1984
Creator Peter O'Toole, Mariel Hemingway September 1985
Enemy Mine Dennis Quaid, Louis Gossett, Jr. December 1985
The Best of Times Robin Williams, Kurt Russell January 1986
Touch & Go Michael Keaton, Maria Conchita August 1986
Alonso
Morgan Stewart's Coming Home Jon Cryer, Lynn Redgrave February 1987
The Big Easy Dennis Quaid, Ellen Barkin August 1987
In the Mood Patrick Dempsey, Beverly D'Angelo September 1987
Rent-A-Cop Burt Reynolds, Liza Minelli January 1988
The Night Before Keanu Reeves, Lori Louglin March 1988
My Best Friend is a Vampire Robert Sean Leonard, Cheryl May 1988
Pollack
Jacknife Robert DeNiro, Ed Harris March 1989
Time Flies When You're Alive Paul Linke July 1989
Kickboxer Jean Claude Van Damme August 1989
Homer & Eddie Whoopi Goldberg, James Belushi December 1989
Blood of Heroes Rutger Hauer, Joan Chen February 1990
Kickboxer II Sasha Mitchell, Peter Boyle June 1991
Kickboxer III Sasha Mitchell June 1992
Paydirt Jeff Daniels, Catherine O'Hara August 1992
Knights Kris Kristofferson, Kathy Long November 1993
Brainsmasher Andrew Dice Clay, Teri Hatcher November 1993
Kickboxer IV Sasha Mitchell July 1994
The Stranger Kathy Long March 1995
The Redemption Mark Dacascos August 1995
The Haunted Heart Diane Ladd, Olympia Dukakis January 1996
</TABLE>
3
<PAGE> 4
DISTRIBUTION
Theatrical - The Company, when practical, has licensed its pictures to
distributors for theatrical distribution in the domestic market. These
distributors undertake all activities related to the distribution of the
Company's motion pictures, including booking the picture into theaters, shipping
prints and collecting film rentals. In certain cases distributors have advanced
the costs of advertising and publicizing the motion pictures and the manufacture
of prints, however, in most cases the Company has been required to fund or
arrange funding for these costs itself. The Company's most recent pictures,
however, were not theatrically released and were initially released on either
home video or pay television.
Home Video - Distribution into the home video market has occurred by
licensing the home video rights for the Company's pictures to video distributors
including HBO Video, Paramount Pictures, Live Home Video and Trimark Pictures.
These video distributors in turn sell videocassettes to video retailers that
rent or sell videocassettes to consumers.
Pay and Free Television - Distribution on pay television has occurred by
licensing the pay television rights of its movies to cable television companies
such as HBO/Cinemax, Showtime/The Movie Channel and various pay-per-view
distributors. After licensing to pay television, the Company's films are then
made available to television stations and basic cable outlets. The Company has
licensed the free television rights to its films to companies such as ITC
Entertainment and Worldvision Enterprises who in turn sell packages of films to
television stations and basic cable services.
Other Rights - Network television, non-theatrical, music publishing,
soundtrack album, novelization, and other miscellaneous rights in the Company's
pictures have been, whenever possible, licensed by the Company to third parties.
The revenue to be derived from the exercise of these other rights is generally
not as significant as revenue from other sources.
International Markets - The Company previously generated substantial
revenues from the licensing of its pictures outside of the United States.
However, in 1996 the Company sold the international distribution rights to most
of its films to another company. For those pictures where international
distribution rights are still owned by the Company, it licenses these pictures
to local distributors on a territory-by-territory basis. Each license may cover
one or more pictures, and may include all rights or only certain rights. Sales,
collections and delivery of product are handled by outside foreign sales
organizations. Such organizations generally receive a commission based on a
percentage of cash receipts. The Company believes that, based on its current and
anticipated future level of film production, it is more efficient and cost
effective to use outside foreign sales organizations rather than to maintain it
own staff.
EMPLOYEES
As of April 30, 1998, the Company employed three full-time employees in
its Los Angeles office. During the production of a motion picture, the Company
would engage between thirty and one-hundred twenty-five additional employees for
that production. The compensation of these additional employees, including in
some cases the right to participate in the net or gross revenues of a particular
picture, is included in the capitalized cost of the related picture. The Company
is subject to the terms of various industry-wide collective bargaining
agreements with the Writers Guild of America, the Directors Guild of America,
and the Screen Actors Guild, among others. The Company considers its employee
relations to be satisfactory at present, although the renewal of these union
contracts does not depend on the Company's activities or decisions alone. Any
strike, work stoppage or other labor disturbance may have a materially adverse
effect on the production of motion pictures.
4
<PAGE> 5
COMPETITION
The motion picture industry is highly competitive. The Company faces
intense competition from motion picture studios and numerous independent
production companies, many of which have significantly greater financial
resources than the Company. All of these companies compete for motion picture
projects and talent and are producing motion pictures that compete for
exhibition time at theaters, on television, and on home video with pictures
produced by the Company.
REGULATION
Distribution rights to motion pictures are granted legal protection
under the copyright laws of the United States and most foreign countries, which
provide substantial civil and criminal sanctions for unauthorized duplication
and exhibition of motion pictures. Motion pictures, musical works, sound
recording, artwork, still photography and motion picture properties are each
separate works subject to copyright under most copyright laws, including the
United States Copyright Act of 1976, as amended. The Company plans to take all
appropriate and reasonable measures to obtain agreements from licensees to
secure, protect and maintain copyright protection for all motion pictures under
the laws of all applicable jurisdictions.
The Classification and Rating Administration of the Motion Picture
Association of America, an industry trade association, assigns ratings for
age-group suitability for motion pictures. The Company submits its pictures for
such ratings. Management's current policy is to produce motion pictures that
qualify for a rating no more restrictive than "R".
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 1901 Avenue of
the Stars, Suite 1545, Los Angeles, California 90067 and consist of
approximately 1,500 square feet leased on a month-to-month basis. In
management's opinion, the space currently occupied will be adequate for future
needs. The Company does not own or intend to acquire production facilities and
would rent any such facilities as needed on a film-by-film basis. The Company
has not experienced any difficulty to date in obtaining such facilities.
ITEM 3. LEGAL PROCEEDINGS
On March 3, 1997, Jasmine Films, Inc. ("Jasmine") initiated arbitration
with the American Arbitration Association of its claim that the Company, among
other things, breached the terms of a limited partnership agreement between the
Company and Jasmine (the "Jasmine Litigation"). In a ruling dated December 24,
1997, an arbitrator dismissed with prejudice all of Jasmine's claims against the
Company.
On March 19, 1997, Strother Film Partners II and Strother Investment Co.
(collectively, "Strother") filed a lawsuit against the Company and the Estate of
Stephen Friedman in Los Angeles Superior Court alleging, among other things,
that the Company breached the terms of a March 1990 settlement agreement between
Strother and the Company (the "Strother Litigation"). On April 8, 1998, the
Company entered into a settlement agreement with Strother whereby Strother
released all of its claims against the Company and the Estate of Stephen
Friedman in exchange for the sum of $52,500.
In the ordinary course of business, the Company has or may become
involved in disputes or litigation which in the aggregate are not believed by
management to be material to its financial position or results of operations.
5
<PAGE> 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on April 16,
1998. Martin Davidson and Kenneth Aguado were each elected to the board of
directors for terms expiring in 2000 and 2001, respectively. Three proposals
submitted for shareholder approval along with the results of voting on each are
as follows:
1. The approval of the issuance of shares of common stock to the Morgan
Kent Group, Inc., to provide such entity with approximately 53% of
the outstanding shares of common stock of the Company immediately
upon such stock issuance. This proposal was approved by a vote of
4,139,918 for and 28,065 against with 15,014 abstentions and
1,212,119 broker non-votes. The transaction was later abandoned.
2. The approval of an amendment to the Company's restated certificate of
incorporation to effect a reverse split of the Company's common stock
on the basis of one share for each three shares then issued and
outstanding. This proposal was approved by a vote of 5,341,918 for
and 47,633 against with 5,565 abstentions.
3. Ratification of the accounting firm of Stonefield Josephson, Inc.
to serve as the Company's independent auditors for fiscal year 1998.
This proposal was approved by a vote of 5,362,875 for and 27,390
against with 4,851 abstentions.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq SmallCap Market tier of
the Nasdaq Stock Market under the symbol: "KREN". The following table sets forth
the high and low sales prices of the Company's common stock as reported by
Nasdaq through April 30, 1998 (all per share information in this report reflects
a reverse 1-for-3 stock split effected by the Company on April 17, 1998):
<TABLE>
<CAPTION>
FISCAL YEAR 1997 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter 2 1/4 1 7/8
Second Quarter 2 5/32 1 1/2
Third Quarter 1 31/32 1 5/16
Fourth Quarter 3 9/32 1 5/16
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter 3 21/32 1 1/8
Second Quarter 1 7/8 1 1/8
Third Quarter 2 1/16 1 1/2
Fourth Quarter 2 7/16 1 5/16
</TABLE>
As of July 20, 1998, the Company had approximately 248 stockholders of
record. In addition, the Company believes it has over 650 beneficial owners
holding shares in street name.
On June 9, 1997, based upon the Company's recognition that its business
plan did not require its then existing cash balance, the Company made a cash
distribution on June 27, 1997 of $3,956,695, or $2.10 per share of common stock,
to shareholders of record on June 20, 1997. Future distributions, if any, will
depend on the Company's final strategic plans. (SEE
6
<PAGE> 7
"ITEM 6. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS").
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
During the fiscal year ended April 30, 1998, the Company did not produce
any new films and derived revenues almost exclusively from the exploitation of
films produced in prior fiscal years. Following the death on October 4, 1996 of
Mr. Stephen Friedman, then Chairman of the Board of Directors and Chief
Executive Officer of the Company, the Company has explored various business
options, including, among other things, the liquidation of the Company, the sale
of the Company as a going concern to an outside party, the sale of substantially
all of the assets of the Company to an outside party and the issuance of shares
of common stock to an outside party which would provide a new source of
financing for the Company. From January through May 1997, the Company had
discussions with over twenty outside parties which expressed varying degrees of
interest in acquiring all or part of the Company or in supplying additional
capital in return for an equity interest in the Company.
On June 9, 1997, based upon the Company's recognition that its business
plan did not require its then existing cash balance, the Company made a cash
distribution on June 27, 1997 of $3,956,695, or $2.10 per share of common stock,
to shareholders of record on June 20, 1997.
On December 11, 1997, the Company entered into an agreement with the
Morgan Kent Group, Inc. ("Morgan Kent") wherein the Company was to issue common
stock to Morgan Kent sufficient to give Morgan Kent 53% of the outstanding
common stock upon such issuance in exchange for $2,967,738. Prior to the stock
issuance, the Company was to make a cash distribution to shareholders of
approximately $1.26 per share. The agreement between the Company and Morgan Kent
was terminated on June 3, 1998.
On June 30, 1998, the Company announced that it was again seeking
acquisition and merger proposals for the Company. All of the plans and
strategies of the Company are subject to the outcome of any such proposals.
OVERVIEW
In recent years the Company's business has been to produce films with
budgets between $1,000,000 and $3,000,000 that are released directly to the home
video or pay television markets both domestically and abroad. During the fiscal
year ended April 30, 1998, the Company did not produce any films. The Company's
most recent picture, The Redemption, was completed in early 1995 and premiered
on the Home Box Office pay television service in August 1995. Subject to its
overall strategic direction, the Company may continue to produce these types of
films but will generally seek to produce films with budgets between $3,000,000
and $10,000,000. Subject to its overall strategic direction, the Company expects
to increase its expenditures on development activities, including the purchase
of books and screenplays, to obtain the types of projects that will attract
third party financing and subsequently achieve commercial success. (SEE "ITEM 1.
- - DESCRIPTION OF BUSINESS").
The Company's revenues have been derived almost exclusively from the
exploitation of the feature films it produces and are typically spread over a
number of years. The Company attempts to generate revenues from theatrical
distributors as soon as possible following
7
<PAGE> 8
completion of a picture. However, lower budget films, of which the Company has
produced most recently, often do not have a theatrical release. Revenues from
home video are initially recognized when a film becomes available for release on
videocassette, typically six months after the initial theatrical release or,
when no theatrical release occurs, upon delivery of the film to the distributor.
Revenues from pay and free television of a film are similarly recognized when a
film becomes available for exploitation in those media, typically six to
twenty-four months after the initial release. Some distribution contracts,
however, may license more than one medium, a "multiple rights license". In this
case, the full license fee is recognized when the film is exploited in the first
available medium. Revenues from international markets generally follow the same
pattern as revenues from the domestic market and may include multiple rights
licenses as well. However, the Company has sold the international distribution
rights to most of its films to another company (the "Foreign Sale") and expects
a substantial decrease in international revenues due to this sale. As a result
of these factors, the Company's revenues vary significantly each year depending
on the number and success of release of films that become available in the
various media during that fiscal year.
As revenues have been recognized for each film, the Company has
amortized the costs incurred in producing that film. The Company has amortized
film costs under the income forecast method as described in Financial Accounting
Standards Board Statement No. 53 which provides that film costs are amortized
for a motion picture in the ratio of revenue earned in the current period to the
Company's estimate of total revenues to be realized. The Company's management
has periodically reviewed its estimates on a film-by-film basis and, when
unamortized costs exceed net realizable value for a film, that film's
unamortized costs have been written down to net realizable value. Costs relating
to projects that have been abandoned or sold before being produced have been
charged to overhead and capitalized to film costs in the year that event occurs.
RESULTS OF OPERATIONS
For the year ended April 30, 1998 feature film revenues were
approximately $1,538,000 as compared to approximately $2,357,000 for the year
ended April 30, 1997. The substantial decrease in feature film revenues of
approximately 35% results primarily from the fact that the Company has not
produced any new films since the fiscal year ended April 30, 1995. Until such
time as the Company either produces new films or develops and implements another
overall strategic plan, the Company expects that its feature film revenues will
continue to decline. Interest income decreased to approximately $160,000 for the
year ended April 30, 1998 from approximately $329,000 reflecting the decrease in
marketable securities held during the year versus the same period last year.
Costs related to revenue as a percentage of feature film revenues
decreased to approximately 38% for the year ended April 30, 1998 from
approximately 50% for the year ended April 30, 1997. This decrease results from
the fact that a significant portion of the costs associated with the Company's
films have previously been amortized such as All of Me, Kickboxer, The Big Easy,
Kickboxer II and Knights which generated significant revenue during the fiscal
year with little or no amortization of costs associated with those revenues.
Selling expenses decreased by approximately 55% to approximately $58,000 during
the year fiscal ended April 30, 1998 versus approximately $128,000 during the
previous fiscal year reflecting the overall decrease in the Company's feature
film revenues.
General and administrative costs increased to approximately $1,012,000
during the year ended April 30, 1998 versus approximately $799,000 during the
same period last year. Reductions in salaries and general office expenditures
were offset by increases in public company expenditures and a substantial
increase of approximately $314,000 in legal
8
<PAGE> 9
expenditures resulting from the Jasmine Litigation, the Strother Litigation and
the Morgan Kent transaction. (SEE "ITEM 3. - LEGAL PROCEEDINGS" AND "RECENT
DEVELOPMENTS").
Net income decreased to approximately $39,000 for the year ended April
30, 1998 versus approximately $589,000 for the year ended April 30, 1997
reflecting lower feature film revenues and interest income plus substantially
higher legal expenditures. During the years ended April 30, 1998 and April 30,
1997, the Company had no significant provision for income taxes due to the
utilization of tax loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The production of motion pictures requires substantial capital. In
producing a motion picture, the Company may expend substantial sums for both the
production and distribution of a picture, before that film generates any
revenues. In many instances the Company obtains advances or guarantees from its
distributors but these advances and guarantees generally defray only a portion
of a film's cost. The Company's principal source of working capital during the
year ended April 30, 1998 was motion picture licensing income. Except for the
financing of film production costs, management believes that its existing cash
resources will be sufficient to fund its ongoing operations.
The Company's net cash provided by operating activities decreased to
approximately $373,000 as compared to approximately $1,740,000 during the year
ended April 30, 1997. The Company used its operating cash flow plus cash flow
generated by the sale of marketable securities to make a cash distribution to
its shareholders of approximately $3,957,000 on June 27, 1997. As of April 30,
1998, the Company had cash, cash equivalents and marketable securities of
approximately $2,659,000 as compared to approximately $6,215,000 as of April 30,
1997.
FUTURE COMMITMENTS
The Company has no material commitments for capital expenditures. The
Company will evaluate the adequacy of and need for capital resources once a
final strategic plan has been developed. (SEE "RECENT DEVELOPMENTS").
FORWARD-LOOKING STATEMENTS
The foregoing discussion, as well as the other sections of this Annual
Report on Form 10-KSB, contains forward-looking statements that reflect the
Company's current views with respect to future events and financial results.
Forward-looking statements usually include the verbs "anticipates," believes,"
"estimates," "expects," "intends," "plans," "projects," "understands" and other
verbs suggesting uncertainty. The Company reminds shareholders that
forward-looking statements are merely predictions and therefore inherently
subject to uncertainties and other factors which could cause the actual results
to differ materially from the forward-looking statements. Potential factors that
could affect forward-looking statements include, among other things, the
Company's ability to identify, produce and complete film projects which are
successful in the market, to arrange financing, distribution and promotion for
those projects on favorable terms in various markets, and to attract and retain
qualified personnel. In addition, the Company is currently seeking merger and
acquisition proposals for the Company and its plans, strategies and future
results are subject to the outcome of any such proposals.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements of Kings Road Entertainment, Inc. are listed on
the Index to Financial Statements set forth on page F-1.
9
<PAGE> 10
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the directors
and executive officers of the Company. Directors are elected at the annual
meeting of stockholders to serve for staggered terms of three years each and
until their successors are elected and qualified. Officers serve at the pleasure
of the Board of Directors (the "Board") of the Company. The Board has an audit
committee consisting of Mr. Davidson and Mrs. Aguado. Except as indicated below,
there are no other family relationships between any of the directors or
executive officers.
<TABLE>
<CAPTION>
EXPIRATION
NAME AGE POSITION OF TERM
---- --- -------- ----------
<S> <C> <C> <C>
Kenneth Aguado 40 Chairman and Chief Executive Officer 2001
Christopher Trunkey 32 Senior Vice President, Chief ------
Financial and Administrative
Officer and Secretary
Martin Davidson 58 Director 2000
Susan Aguado 65 Director 1999
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
KENNETH AGUADO has been a director of the Company since February 1989.
Mr. Aguado became Chief Executive Officer in October 1996 following the death of
Stephen Friedman. In July 1994, Mr. Aguado rejoined the Company as Vice
President of Creative Affairs, a position he held from 1981 until 1990. Between
1990 and 1994, Mr. Aguado headed production for Miller-Boyett Motion Pictures at
Warner Brothers and was Vice-President of Production for Badham/Cohen Group at
Universal Pictures. Mr. Aguado attended Tulane University, where he graduated
with a degree in Psychology. Mr. Aguado is the son of Susan Aguado.
CHRISTOPHER TRUNKEY, Senior Vice President, Chief Financial and
Administrative Officer and Secretary joined the Company in May 1994. Between
September 1997 and May 1998, Mr. Trunkey served as a consultant to the Company
while also serving as Senior Vice President of Overseas Filmgroup. Before
joining the Company, Mr. Trunkey was Controller for Ulysse Entertainment from
October 1993 to May 1994. Prior to Ulysse Entertainment, Mr. Trunkey was
Director of Financial Planning at Reeves Entertainment from May 1990 through
September 1993 and Staff Accountant for Telautograph Corporation from August
1988 through May 1990. Mr. Trunkey is a graduate of Drake University with a
degree in Finance.
MARTIN DAVIDSON has been a director of the Company since February 1989.
He has been a producer, writer, and director of feature films since 1972. He
produced the film "A Fan's Notes," wrote, produced and directed "The Lords of
Flatbush," wrote and directed "Almost
10
<PAGE> 11
Summer" and "Eddie and the Cruisers," and directed "Hero at Large," "Long Gone,"
"Heart of Dixie," and "Hard Promises". Mr. Davidson was the head of the motion
picture division of Ashley Famous Agency from 1960 to 1964. He attended Syracuse
University from 1957 to 1958 and the American Academy of Dramatic Arts from 1959
to 1961.
SUSAN AGUADO has been a director of the Company since October 1996.
Since March 1992, Mrs. Aguado has been retired. Between March 1989 and March
1992, Mrs. Aguado was Creative Director for Hometown Films and from January 1983
to March 1989, Mrs. Aguado was Vice President of East Coast Development for the
Company. Mrs. Aguado is graduate of New York University. Mrs. Aguado is the
mother of Kenneth Aguado.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company does not know of any person or beneficial owner that did not
timely file the reports required by Section 16(a) of the Securities Exchange
Act.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for each of the last
three fiscal years of the Company's Chief Executive Officers and up to four of
the other most highly compensated individuals serving as executive officers at
April 30, 1998 whose total salary and bonus exceeded $100,000 for the fiscal
year ("Named Officers"). No other Named Officer of the Company received salary
and bonus in excess of $100,000 in any of the last three fiscal years.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -------------
------------------------ STOCK OPTIONS ALL OTHER
NAME AND POSITION YEAR SALARY ($) BONUS ($) (SHARES) COMPENSATION
----------------- ---- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Kenneth Aguado (1)
Chairman and Chief 1998 $115,269 $10,000 27,708 (2) $64,314 (3)
Executive Officer 1997 89,577 3,596 0 (2) 619 (4)
Stephen Friedman (1)
Chairman and Chief 1997 115,385 0 0 0
Executive Officer 1996 237,500 0 0 0
</TABLE>
- ---------------
(1) Mr. Aguado became the Company's Chief Executive Officer on
October 7, 1996 following the death of Mr. Friedman on October
4, 1996.
(2) The exercise price of options to purchase 27,708 shares granted
to Mr. Aguado on October 14, 1996 was adjusted from $1.68 per
share to $.00 as a result of the cash distribution to
shareholders of $2.10 per share on June 27, 1997.
(3) Includes $58,808 representing the difference between the
exercise price and the market price on the date of exercise of
stock options exercised by Mr. Aguado and $5,506 representing
contributions made by the Company on behalf of Mr. Aguado
pursuant to the Company's SIMPLE IRA plan.
(4) Represents contributions made by the Company on behalf of Mr.
Aguado pursuant to the Company's SIMPLE IRA plan.
11
<PAGE> 12
OPTION GRANTS, EXERCISES AND YEAR-END VALUES
Shown below is information with respect to the exercise by the Named
Officers of options during the fiscal year ended April 30, 1998.
<TABLE>
<CAPTION>
SHARES
ACQUIRED VALUE
NAME ON EXERCISE REALIZED (1)
---- ----------- ------------
<S> <C> <C>
Stephen Friedman (2) 161,833 $273,094
Kenneth Aguado 33,333 58,808
</TABLE>
- ---------------
(1) Based upon the difference between the exercise price and the
market price on the date of exercise.
(2) The stock options granted to Mr. Friedman were exercised by the
Estate of Stephen Friedman.
No options were granted during the fiscal year ended April 30, 1998 and
no options were outstanding as of April 30, 1998. An option to purchase up to
66,667 shares of common stock at an exercise price of $1 7/32 was granted to Mr.
Aguado on July 15, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of July 20, 1998,
concerning ownership of shares of Common Stock by each person who is known by
the Company to own beneficially more than 5% of the issued and outstanding
Common Stock of the Company:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS
------------------------------------ --------- ----------
<S> <C> <C>
Estate of Stephen Friedman (1) 1,060,956 (2) 55.5%
c/o William Immerman, Executor
1999 Avenue of the Stars, Suite 1250
Los Angeles, CA 90067
</TABLE>
- ---------------
(1) Susan Aguado, Joan Aguado Shapiro and Kenneth Aguado are 50%,
25% and 25% beneficiaries, respectively, of the Friedman
Estate's shares except as noted in footnote (2).
(2) Includes 33,333 shares owned by the Stephen J. Friedman Films,
Inc. Employee Pension Plan of which Mr. Immerman is the trustee
and Susan Aguado is the sole beneficiary.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of July 20, 1998, certain information
concerning ownership of shares of Common Stock by each director of the Company
and by all executive officers and directors of the Company as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF DIRECTORS OR NUMBER OF PERCENT OF
NUMBER OF PERSONS IN GROUP SHARES CLASS
-------------------------------- --------- ----------
<S> <C> <C>
Susan Aguado 547,145 (1) 28.6%
235 Cleveland Drive
Croton, NY 10520
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
NAME AND ADDRESS OF DIRECTORS OR NUMBER OF PERCENT OF
NUMBER OF PERSONS IN GROUP SHARES CLASS
-------------------------------- --------- ----------
<S> <C> <C>
Kenneth Aguado 291,905 (2) 15.3%
4309 Wilkinson Avenue
Studio City, CA 91604
Martin Davidson 0 00.0%
1505 Viewsite Terrace
Los Angeles, CA 90069
All Executive Officers and
Directors as a Group (4 persons) 848,516 44.4%
</TABLE>
- ---------------
(1) Includes 513,812 shares representing 50% of the 1,027,623 shares
owned by the Friedman Estate of which Mrs. Aguado is a 50%
beneficiary and 33,333 shares owned by the Stephen J. Friedman
Films, Inc. Employee Pension Plan of which Mrs. Aguado is the
sole beneficiary. See "Principal Stockholders".
(2) Includes 256,906 shares representing 25% of the 1,027,623 shares
owned by the Friedman Estate of which Mr. Aguado is a 25%
beneficiary. See "Principal Stockholders".
The Friedman Estate is currently the controlling shareholder of the
Company. The distribution of its common stock to its beneficiaries, which is
expected shortly, will increase the record common stock ownership of Susan
Aguado, Joan Aguado Shapiro, and Kenneth Aguado by 547,145, 256,906 and 256,906
shares, respectively, although these shares are already included as beneficially
owned in the table above. (SEE "PRINCIPAL STOCKHOLDERS").
Except as otherwise disclosed herein, the Company does not know of any
arrangements, including any pledge of the Company's securities, the operation of
which at a subsequent date may result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In May 1997, the Company entered into an Assignment and Mutual Release
Agreement with S.J.F. Productions Ltd. ("SJF Ltd.") and Stephen J. Friedman
Films, Inc. ("SJF Inc.") (SJF Ltd. And SJF Inc. collectively, "SJF") with
respect to SJF's rights to a motion picture entitled "Lovin' Molly" ("Film").
SJF Inc. is the general partner of SJF Ltd. The Friedman Estate is the sole
shareholder of SJF Inc. and is a limited partner of SJF Ltd. The film was
encumbered by the claim of Leucadia National Corp. ("LNC") to be paid at least
$600,000 by SJF solely from the Film's revenues pursuant to a loan agreement
between SJF and LNC's predecessor-in-interest ("Agreement"), and by SJF's claim
of copyright ownership in the film. The Company acquired LNC's rights to the
Film, including LNC's rights under the Agreement, in exchange for $75,000 and
subsequently acquired SJF's rights to the Film in exchange for releasing SJF of
its obligations under the Agreement.
13
<PAGE> 14
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-B)
3.1 Restated Certificate of Incorporation of Registrant. (1)
3.2 Bylaws of Registrant. (2)
10.1 1998 Stock Option Plan. (1)
10.2 Grant of Nonqualified Stock Option to Kenneth Aguado. (1)
27 Financial Data Schedule. (1)
---------------
(1) Filed electronically with Securities and Exchange Commission,
omitted in copies distributed to shareholders or other persons.
(2) Incorporated by reference to Form 10-K for the fiscal year ended
April 30, 1988.
(b) FORMS 8-K
On December 24, 1997, the Company filed a Form 8-K reporting under Item
1 thereof a change in control resulting from the execution of a Stock
Purchase Agreement with the Morgan Kent Group, Inc. that was
subsequently terminated on June 3, 1998.
(c) SEE (a) ABOVE
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: July 20, 1998 KINGS ROAD ENTERTAINMENT, INC.
By: /s/Christopher M. Trunkey
-------------------------------
Christopher M. Trunkey,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/Kenneth Aguado Chairman of the Board of July 20, 1998
- ------------------------------- Directors and Chief Executive
KENNETH AGUADO Officer (Principal Executive
Officer)
/s/Martin Davidson Director July 20, 1998
- -------------------------------
MARTIN DAVIDSON
/s/Susan Aguado Director July 20, 1998
- -------------------------------
SUSAN AGUADO
/s/Christopher M. Trunkey Vice President, Chief Financial July 20, 1998
- ------------------------------- and Administrative Officer and
CHRISTOPHER M. TRUNKEY Secretary (Principal Financial
and Accounting Officer)
</TABLE>
15
<PAGE> 16
KINGS ROAD ENTERTAINMENT, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1998
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Balance Sheet as of April 30, 1998 F-3
Statements of Income for the Years
Ended April 30, 1998 and 1997 F-4
Statements of Shareholders' Equity
for the Years Ended April 30, 1998 and 1997 F-5
Statements of Cash Flows for the Years
Ended April 30, 1998 and 1997 F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE> 17
STONEFIELD JOSEPHSON, INC.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of
Directors of Kings Road Entertainment, Inc.
Los Angeles, California:
We have audited the accompanying balance sheet of Kings Road Entertainment, Inc.
(the "Company") as of April 30, 1998, and the related statements of income,
shareholders' equity and cash flows for the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kings Road
Entertainment, Inc. as of April 30, 1998, and the results of their operations
and their cash flows for the two years then ended, in conformity with generally
accepted accounting principles.
/s/Stonefield Josephson, Inc.
- -------------------------------
STONEFIELD JOSEPHSON, INC.,
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
July 15, 1998
F-2
<PAGE> 18
KINGS ROAD ENTERTAINMENT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
APRIL 30, 1998
--------------
<S> <C>
ASSETS
Cash and Cash Equivalents $ 2,658,500
Accounts Receivable, net of allowance of $10,000 373,463
Film Costs, net of amortization of $168,244,816 300,673
Prepaid Expenses 47,841
Fixed Assets 14,485
Other Assets 2,500
------------
TOTAL ASSETS $ 3,397,462
============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts Payable $ 233,167
Accrued Expenses 15,000
Deferred Revenue 9,600
------------
TOTAL LIABILITIES 257,767
COMMITMENTS AND CONTINGENCIES 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, 12,000,000 shares
authorized, 1,911,748 shares issued and outstanding 51,040
Additional Paid-In Capital 21,085,278
Deficit (17,996,623)
------------
TOTAL SHAREHOLDERS' EQUITY 3,139,695
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,397,462
============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE> 19
KINGS ROAD ENTERTAINMENT, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES
Feature Films $ 1,538,292 $ 2,356,940
Interest Income 159,802 328,705
Other Income 0 2,079
----------- -----------
1,698,094 2,687,724
COSTS AND EXPENSES
Costs Related to Revenue 584,333 1,171,843
Selling Expenses 57,645 128,118
General & Administrative Expenses 1,011,895 799,087
----------- -----------
1,653,873 2,099,048
----------- -----------
INCOME BEFORE INCOME TAXES 44,221 588,676
Provision for Income Taxes 5,404 (291)
----------- -----------
NET INCOME $ 38,817 $ 588,967
=========== ===========
Net Income Per Share - Basic $ 0.02 $ 0.35
=========== ===========
Weighted Average Number of Common
Shares - Basic 1,873,954 1,706,581
=========== ===========
Net Income Per Share - Diluted $ 0.02 $ 0.32
=========== ===========
Weighted Average Number of Common Shares
and Common Share Equivalents - Diluted 1,873,954 1,820,078
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 20
KINGS ROAD ENTERTAINMENT, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Common Additional Retained Total
Stock Stock Paid-In Earnings/ Shareholders'
Shares Amount Capital (Deficit) Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance,
April 30, 1996 1,706,581 $ 45,716 $ 24,902,177 ($18,624,407) $ 6,323,486
Net Income -- -- -- 588,967 588,967
------------ ------------ ------------ ------------ ------------
Balance,
April 30, 1997 1,706,581 45,716 24,902,177 (18,035,440) 6,912,453
Exercise of
Stock Options 205,167 5,324 139,797 -- 145,121
Distribution to
Shareholders -- -- (3,956,696) -- (3,956,696)
Net Income -- -- -- 38,817 38,817
------------ ------------ ------------ ------------ ------------
Balance,
April 30, 1998 1,911,748 $ 51,040 $ 21,085,278 ($17,996,623) $ 3,139,695
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 21
KINGS ROAD ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 38,817 $ 588,967
Adjustments to reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 592,751 1,178,032
Change in Assets and Liabilities:
(Increase)/Decrease in Accounts Receivable (59,614) 294,270
Increase in Prepaid Expenses (34,546) (9,584)
Decrease in Other Assets 0 3,000
(Decrease)/Increase in Accounts Payable (82,554) 13,544
Decrease in Accrued Expenses 0 (76,582)
Decrease in Income Taxes Payable (3,482) (44,459)
Decrease in Deferred Revenue (78,200) (207,214)
----------- -----------
NET CASH AND CASH EQUIVALENTS
PROVIDED BY OPERATING ACTIVITIES 373,172 1,739,974
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale/(Purchase) of Marketable Securities 5,967,031 (1,519,648)
Disposal/(Purchase) of Fixed Assets 484 (17,880)
Gross Additions to Film Cost (118,816) (359,781)
----------- -----------
NET CASH AND CASH EQUIVALENTS
PROVIDED BY/(USED IN) INVESTING ACTIVITIES 5,848,699 (1,897,309)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of Stock Options 145,121 0
Distribution to Shareholders (3,956,696) 0
----------- -----------
NET CASH AND CASH EQUIVALENTS
USED IN FINANCING ACTIVITIES (3,811,575) 0
----------- -----------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 2,410,296 (157,335)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 248,204 405,539
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,658,500 $ 248,204
=========== ===========
Cash paid for:
Interest 0 0
Taxes 5,404 70,158
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 22
KINGS ROAD ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Recognition of Revenues - The Company recognizes revenues in accordance with the
provisions of Financial Accounting Standards Board ("FASB") Statement No. 53.
Revenues from theatrical exhibition are recognized on the dates of exhibition.
Revenues from international, home video, television and pay television license
agreements are recognized when the license period begins and the film is
available for exhibition or exploitation pursuant to the terms of the applicable
license agreement. Once complete, a typical film will generally be made
available for licensing as follows:
<TABLE>
<CAPTION>
Months After Approximate
Marketplace Initial Release Release Period
----------- --------------- --------------
<S> <C> <C>
Domestic theatrical 6 months
All international markets 1-10 years
Domestic home video 6 months 6-12 months
Domestic cable/pay television 12-18 months 18 months
Domestic syndicated/free television 24-48 months 1-6 years
</TABLE>
During 1998, the Company earned revenue from three significant customers of
approximately $740,000 (44%) of revenues. During 1997, the Company earned
revenue from two significant customers of approximately $1,008,000 (37%) of
revenues, of which approximately $158,000 is included in accounts receivable as
of April 30,1998.
Revenues from foreign sources were approximately $956,000 and $1,471,000 in 1998
and 1997, respectively.
Film Costs - Film costs, including related interest and overhead, are
capitalized as incurred. Profit participations and residuals, if any, are
accrued in the proportion that revenue for a period bears to the estimated
future revenues. The individual film forecast method set forth in FASB Statement
No. 53 is used to amortize these costs based on the ratio of revenue earned in
the current period to the Company's estimate of total revenues to be realized.
Management periodically reviews its estimates on a film-by-film basis and, when
unamortized costs exceed net realizable value for a film, that film's
unamortized costs are written down to net realizable value. Costs related to
projects which are abandoned or sold before being produced are charged to
overhead and capitalized to film costs in the year that event occurs.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE> 23
KINGS ROAD ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and Amortization - Depreciation of fixed assets is computed by the
straight-line method over the estimated useful lives of the assets ranging from
three to five years. Leasehold improvements are amortized over the useful life
of the improvements or the terms of the applicable lease, whichever is less.
Earnings Per Share - The Company has adopted Statement of Financial Accounting
Standard No. 128, Earnings Per Share ("SFAS No. 128"), which became effective
for financial statements issued for periods ending after December 15, 1997. In
accordance with SFAS No. 128, prior year earnings per share amounts have been
restated. SFAS No. 128 was issued to simplify the standards for calculating
earnings per share ("EPS") previously in Accounting Principles Board No. 15,
Earnings Per Share. SFAS No. 128 replaces the presentation of primary EPS with
basic EPS. The new rules also require dual presentation of basic and diluted EPS
on the face of the statement of income.
Common Stock - In April 1998, the Company effected a 1-for-3 reverse stock split
for shareholders of record on April 17, 1998. All share and per share data in
the financial statements reflect the reverse stock split for all periods
presented.
Concentration of Credit Risk - The Company licenses various rights in its films
to distributors throughout the world. Generally, payment is received in full or
in part prior to the Company's delivery of the film to the applicable
distributor. As of April 30, 1998, approximately 49% of the Company's accounts
receivable were from foreign distributors.
Cash Concentration - The Company maintains its cash balances at financial
institutions that are federally insured, however, at times the Company's
balances may exceed federally insured limits.
NOTE B - FILM COSTS
Film costs consist of:
<TABLE>
<CAPTION>
As Of
April 30, 1998
--------------
<S> <C>
Released Films, less amortization $ 210,017
Films in Production 0
Films in Development 90,656
---------
$ 300,673
=========
</TABLE>
Based on the Company's estimates of revenue as of April 30, 1998, 100% of
unamortized film costs applicable to released films will be amortized during the
three years ended April 30, 2001. No interest or overhead was capitalized to
film costs during the fiscal years ended April 30, 1998 and 1997, as no new
motion pictures were produced.
F-8
<PAGE> 24
KINGS ROAD ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C - FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
As Of
April 30, 1998
--------------
<S> <C>
Office Equipment $201,588
Furniture & Fixtures 31,480
Accumulated Depreciation (218,583)
--------
$ 14,485
========
</TABLE>
NOTE D - COMMITMENTS AND CONTINGENCIES
The Company leases approximately 1,500 square feet of office space on a
month-to-month basis. Rent expense was $28,838 and $30,579 in 1998 and 1997,
respectively.
The Company operates in one business segment, consisting primarily of production
and distribution of feature length motion pictures.
NOTE E - STOCK OPTIONS AND WARRANTS
As of April 30, 1998, the Company did not have any outstanding stock options.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under FASB No. 123, "Accounting for Stock-Based
Compensation," requires the use of valuation models that were not developed for
use in valuing employee stock options. Under APB 25, because the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Proforma information regarding net income and earnings per share under the fair
value method for the year ended April 30, 1997 has not been presented as the
amounts are immaterial.
NOTE F - INCOME TAXES
A reconciliation of the provision for income taxes to the expected income tax
expense at the statutory federal tax rate of 34% is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Computed Expected Tax at Statutory Rate $ 15,035 $ 154,228
State and Local Taxes 4,220 8,276
Foreign Taxes 1,184 6,173
Valuation Allowance (15,035) (168,968)
--------- ---------
$ 5,404 ($ 291)
========= =========
</TABLE>
F-9
<PAGE> 25
KINGS ROAD ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F - INCOME TAXES (CONTINUED)
For federal income tax purposes, the Company has available investment tax
credits of approximately $2,166,000 after being reduced by 35% as a result of
the Tax Reform Act of 1986 (expiring between 2000 and 2002) and net operating
loss carryforwards of approximately $16,626,000 (expiring between 2001 and 2007)
to offset future income tax liabilities.
Deferred tax assets result from temporary differences between financial and tax
accounting in the recognition of revenue and expenses. Temporary differences and
carryforwards which give rise to deferred tax assets are as follows:
<TABLE>
<CAPTION>
As Of
April 30, 1998
--------------
<S> <C>
Deferred Revenue $ 4,000
Film Cost Amortization 18,000
Net Operating Loss Carryforwards 6,650,000
Investment Tax Credit Carryforwards 2,166,000
Foreign Tax Credit Carryforwards 400,000
-----------
9,238,000
Valuation Allowance (9,238,000)
-----------
$ 0
===========
</TABLE>
A valuation allowance of $9,238,000 has been recorded to offset the net deferred
tax assets due to the uncertainty of realizing the benefits of the tax assets in
the future.
NOTE G - LITIGATION AND CONTINGENCIES
In the ordinary course of business, the Company has or may become involved in
disputes or litigation. On the basis of information available to it, management
believes such contingencies will not have a materially adverse impact on the
Company's financial position or results of operations.
NOTE H - INVESTMENT IN LIMITED PARTNERSHIP
In September 1993, the Company entered into an agreement ("Agreement") with
another corporation ("Limited Partner") wherein a limited partnership
("Partnership") was formed for the purpose of producing and distributing one
theatrical motion picture ("Picture") at a cost of approximately $3,000,000. The
Company is the general partner and owns 50% of the Partnership.
Revenue generated by the Picture, after deduction of distribution expenses, is
disbursed equally to the Company and the Limited Partner. For financial
reporting purposes, the Company's contributions to the Picture, and certain
capitalized overhead and interest expenses, are included in film costs. Revenue
from the Partnership is recognized when received and the Company's contributions
to the Picture are amortized according to the individual film forecast method
described in Note A.
F-10
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE
OF INCORPORATION
KINGS ROAD ENTERTAINMENT, INC.
(Pursuant to Section 245 of the
Delaware General Corporation Law)
KINGS ROAD ENTERTAINMENT, INC., a corporation originally incorporated on
February 8, 1980, under the name of Kings Road Productions, Inc., under the
General Corporation Law of Delaware, hereby amends and restates its Certificate
of Incorporation so that the same shall read in its entirety as follows:
FIRST: The name of the corporation is KINGS ROAD ENTERTAINMENT,
INC.
SECOND: The address, including street, number, city and county
of the registered office of the corporation in the State of Delaware is
1209 Orange Street, City of Wilmington, County of New Castle, 19801; and
the name of the registered agent of the corporation in the State of
Delaware at such address is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or
promoted is:
To engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which
the corporation shall have authority to issue is 12,000,000 shares,
consisting of 12,000,000 shares of Common Stock, $.01 par value.
FIFTH: Bylaws for the Corporation may be adopted, amended or
repealed, at any time and from time to time, by the stockholders or the
board of Directors.
SIXTH: A. The Board of Directors shall be divided into three
classes as nearly equal in number as reasonably possible, designated
Class 1, Class 2 and Class 3. The initial terms of office shall expire
as follows: Class 1 directors, at the annual meeting of stockholders in
1988; Class 2 directors, at the annual meeting of stockholders in 1989;
Class 3 directors, at the annual meeting of stockholders in 1990.
Thereafter, at each annual meeting of stockholders, successors to the
class of directors whose terms of office expire in that year shall be
elected to hold office for a term of three (3) years. Each director
shall hold office until his successor is elected and qualified or until
his earlier resignation or removal.
B. No director of the corporation shall be personally
liable to the Corporation or its stockholders for monetary damages for
any breach of fiduciary duty by such a director as a director.
Notwithstanding the foregoing sentence, a director shall be liable to
the extent provided by applicable law (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders; (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) pursuant to Section 174
of the General Corporation Law of the State of Delaware; or (iv) for any
transaction from which such director derived an improper personal
benefit. No amendment to or repeal of this Section B shall apply to or
have any effect on the liability
1
<PAGE> 2
or alleged liability of any director of the corporation for or with
respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
This restated Certificate of Incorporation has been duly adopted by the
Corporation's Board of Directors in accordance with the provisions of Sections
245 and 242 of the General Corporation Law of the State of Delaware, the
Restated Certificate of Incorporation and the Bylaws of this Corporation. This
Restated Certificate of Incorporation only restates and integrates and does not
further amend the provision of this Corporation's Certificate of Incorporation
as heretofore amended or supplemented, and there is no discrepancy between those
provisions and the provisions of this Restated Certificate of Incorporation.
The undersigned declare under penalty of perjury under the laws of the
State of Delaware that the statements contained in the foregoing Certificate are
true and correct of their own knowledge.
Executed at Los Angeles, California on July 16, 1998.
KINGS ROAD ENTERTAINMENT, INC.
A Delaware Corporation
By: /s/Kenneth I. Aguado
-------------------------------
KENNETH I. AGUADO, President
ATTEST:
/s/Christopher M. Trunkey
- -------------------------------
CHRISTOPHER TRUNKEY, Secretary
2
<PAGE> 1
EXHIBIT 10.1
KINGS ROAD ENTERTAINMENT, INC.
1998 STOCK OPTION PLAN
This 1998 Stock Option Plan is hereby adopted by the Company
(capitalized terms not otherwise defined are defined in the final section of
this Plan).
1. PURPOSES OF THE PLAN. The purposes of this Plan are:
- to attract and retain the best available personnel,
- to provide additional incentive to Employees, Directors and
- Consultants, and to promote the success of the Company's
business.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10, options
covering no more than Four Hundred Thousand (400,000) Shares of Common Stock may
be granted under the Plan . The Shares may be authorized, but unissued, or
reacquired Common Stock. Any unpurchased Shares subject to an Option which
terminates or is surrendered pursuant to an Option Exchange Program shall become
available for future Option grants unless the Plan has terminated. However, any
Shares which the Company re-acquires after issuance pursuant to the exercise of
an Option will not be available for future grant under the Plan.
3. TYPE OF OPTIONS; ELIGIBILITY. Options granted under the Plan may be either
Incentive Stock Options or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant. Nonstatutory Options may be granted to
Directors, Employees and Consultants; Incentive Stock Options may be granted
only to Employees unless otherwise permitted under the Code. At the time of
grant, the Administrator shall designate whether Option is an Incentive Stock
Option or a Nonstatutory Stock Option. However, despite any such designation,
any Options which cause the aggregate Fair Market Value of Shares under
incentive stock options granted by the Company, or any Parent or Subsidiary to a
single Optionee (under all plans of the Company and of any Parent or Subsidiary)
to exceed $100,000 will be deemed Nonstatutory Stock Options. For purposes of
this Section 3, the Fair Market Value of the Shares shall be determined as of
the time of grant. Optionees may be granted more than one Option.
4. OPTION EXERCISE PRICE AND CONSIDERATION. When any Option is granted, the
Administrator shall determine:
4.1. NUMBER OF SHARES. The number of Shares subject to the Option,
except that no Officer shall be granted Options to purchase more than 100,000
Shares in any fiscal year of the Company unless permitted by the requirements
for "performance-based compensation" within the meaning of Section 162(m).
4.2. EXERCISE PRICE. The per share exercise price for the Optioned
Shares, which may be more or less than the Fair Market Value, except no
Incentive Stock may be granted with an exercise price per share less than 100%
(110% in the case of an Option granted to a Significant Owner) of Fair Market
Value.
4.3. WAITING PERIOD AND EXERCISE DATES. The period within which the
Option may be exercised and any conditions which must be satisfied before the
Option may be exercised. No Option may have an exercise period which extends
more than ten years (five years in the case of any Incentive Stock Option
granted to a Significant Owner) from the date of grant.
1
<PAGE> 2
4.4. OTHER TERMS AND CONDITIONS. Other terms and conditions including,
but are not limited to, performance criteria, any vesting acceleration or waiver
of forfeiture restrictions, and any restriction or limitation regarding any
Option or the Shares. The Shares received on exercise of any Option may be made
subject to a shareholder's agreement or other restriction or option.
5. EXERCISE OF OPTION.
5.1. PROCEDURE FOR EXERCISE. An Option shall be deemed exercised when
the Company receives all of the following (which may be waived by the
Administrator as permitted by Applicable Laws): (i) written notice of exercise
(in accordance with the Option Agreement) from the person entitled to exercise
the Option, (ii) full payment for the Shares with respect to which the Option is
exercised, and (iii) payment of any required withholding taxes.
5.2. NO FRACTIONAL SHARES. An Option may not be exercised for a fraction
of a Share.
5.3. FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration and method of payment for exercise of an
Option. (In the case of an Incentive Stock Option, the Administrator must
determine the acceptable form of consideration at the time of grant.) To the
extent permitted by the Administrator, consideration may consist of:
- cash;
- a promissory note made by the Optionee in favor of the Company;
- other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair
Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said Option shall be
exercised;
- any combination of the foregoing methods of payment; or
-such other consideration to the extent permitted by Applicable Laws.
5.4. EFFECT ON OPTION. Exercise of an Option in any manner shall
decrease the number of Shares thereafter available by the number of Shares as to
which the Option is exercised, both for purposes of the Plan and for sale under
the Option.
6. ISSUANCE OF SHARES.
6.1. NAME FOR REGISTRATION. Shares issued upon exercise of an Option
shall be issued in the name of the Optionee or, if requested by the Optionee, in
the name of the Optionee and his or her spouse.
6.2. LEGAL COMPLIANCE. The Company is not obligated to issue any Shares
pursuant to the exercise of an Option unless counsel for the Company is
satisfied that the exercise of such Option and the issuance and delivery of such
Shares complies with all relevant provisions of Applicable Law, including,
without limitation, the Securities Act of 1933, as amended, the Exchange Act,
the rules and regulations promulgated thereunder, the requirements of any stock
exchange or quotation system upon which the Shares may then be listed or quoted,
and any other requirements of law or of any regulatory bodies having
jurisdiction over such issuance and delivery. The inability of the Company to
obtain authority from any regulatory body deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares.
2
<PAGE> 3
6.3. INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option, the Company may require that the person exercising such Option represent
and warrant that the Shares are being purchased only for investment and without
any present intention to sell, transfer or distribute such Shares.
6.4. RIGHTS AS STOCKHOLDER. Until the stock certificate evidencing
Shares is actually issued (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company), the Optionee
will have no right to vote or receive dividends or any other rights as a
shareholder with respect to the Optioned Stock, despite any exercise of the
Option. Subject to this Section 6, the Company shall issue (or cause to be
issued) such stock certificate promptly after an Option is exercised. Except as
provided in Section 10, no adjustment will be made for a dividend or other right
for which the record date is prior to the date the stock certificate is actually
issued.
7. WITHHOLDING TAXES. Upon (i) the disposition by an Optionee of Shares acquired
pursuant to the exercise of an Incentive Stock Option within two years of the
granting of such Incentive Stock Option or within one year after exercise of
such Incentive Stock Option, or (ii) the exercise of a Nonstatutory Stock
Option, the Company shall have the right to require the Optionee to pay the
Company the amount of any taxes which the Company may be required to withhold
with respect to such Shares.
8. NON-TRANSFERABILITY OF OPTIONS.
8.1. NO TRANSFER. No Option may be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by
the laws of descent or distribution or may be exercised, during the lifetime of
the Optionee, by anyone except the Optionee, except that the Administrator may,
if it wishes to do so, allow the spouse of the Optionee to hold and/or exercise
the Option pursuant to a qualified domestic relations order as defined by the
Code or Title I of ERISA.
8.2. DESIGNATION OF BENEFICIARY. An Optionee may file a written
designation of a beneficiary who is to receive any Options that remain
unexercised in the event of the Optionee's death. If an Optionee is married and
the designated beneficiary is not his or her spouse, spousal consent shall be
required for such designation to be effective. The Optionee may change such
designation of beneficiary at any time by written notice, subject to the above
spousal consent conditions.
8.3. EFFECT OF NO DESIGNATION. If an Optionee dies and there is no
living beneficiary validly designated under the Plan, the Option may be
exercised on behalf of the Optionee to the extent permitted hereunder (i) by the
executor or administrator of the estate of the Optionee, or (ii) if the Company
does not know that an executor or administrator has been appointed, by the
spouse or to any one or more dependents or relatives of the participant as
determined by the Company, or (iii) if no spouse, dependent or relative is known
to the Company, then by such other person as the Company may designate.
9. ACCELERATED TERMINATION OF OPTION TERM.
9.1. TERMINATION FOR CAUSE. Notwithstanding anything to the contrary
contained in the Plan, no Optionee may exercise any Option (whether otherwise
vested or not) at any time following a Termination Event with respect to such
Optionee.
3
<PAGE> 4
9.2. TERMINATION WITHOUT CAUSE. If an Optionee's Continuous Relationship
terminates (other than as a result of a Termination Event), his or her Option
may be exercised only to the extent that the Optionee was entitled to exercise
it on the date of termination, and only within such period of time as is
determined by the Administrator, and in no event later than the expiration of
the term of such Option as set forth in the Option Agreement. In the case of an
Incentive Stock Option, the Administrator shall determine such period of time
(in no event to exceed ninety (90) days from the date of termination, except
where the termination occurs as a result of death or disability, where the
maximum period shall be twelve months) at the time that the Option is granted.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET
SALE.
10.1. CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, if the outstanding shares of Common Stock are
increased, decreased, changed into or exchanged for a different number or kind
of shares of securities of the Company through reorganization, recapitalization,
reclassification, stock combination, stock dividend, stock split, reverse stock
split or other similar transaction, an appropriate and proportionate adjustment
shall be made in the maximum number and kind of shares as to which Options may
be granted under this Plan. A corresponding adjustment changing the number or
kind of shares allocated to unexercised Options which have been granted prior to
any such change, shall likewise be made. Any such adjustment in the outstanding
Options shall be made without change in the aggregate purchase price applicable
to the unexercised portion of the Options but with a corresponding adjustment in
the price for each share or other unit of any security covered by the Option.
Such adjustment shall be made by the Administrator, whose determination in that
respect shall be final, binding and conclusive.
10.2. DISSOLUTION OR LIQUIDATION. Any Option to the extent not
previously exercised will terminate immediately prior to the consummation of any
dissolution or liquidation of the Company. The Administrator may, in the
exercise of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Administrator and give each Optionee the
right to exercise his or her Option as to all or any part of the Optioned Stock,
including Shares as to which the Option would not otherwise be exercisable.
10.3. MERGER OR ASSET SALE. In the event of a merger of the Company with
or into another corporation, or the sale of substantially all of the assets of
the Company, the Administrator, upon 30 days prior written notice to the
Optionees, may, in its discretion, do one or more of the following: (i) shorten
the period during which Options are exercisable (provided they remain
exercisable for at least 30 days after the date the notice is given); (ii)
accelerate any vesting schedule to which an Option is subject; (iii) arrange to
have the surviving or successor entity grant replacement options with
appropriate adjustments in the number and kind of securities and option prices;
or (iv) cancel any Option upon payment to the Optionee of cash equal to the
excess of the Fair Market Value of the number of Shares as to which the Option
is then exercisable (at the effective time of the merger, reorganization, sale
of other event including to the extent the exercise has been accelerated as
contemplated in clause (ii) above) over the aggregate exercise price with
respect to such Shares. The Administrator may also provide for one or more of
the foregoing alternatives in any particular Option Agreement.
11. SHAREHOLDER APPROVAL. This Plan is subject to approval by the shareholders
of the Company in compliance with Applicable Law within twelve (12) months after
the date the Plan is adopted by the Board. Options may be granted but not
exercised prior to shareholder approval
4
<PAGE> 5
of the Plan. If stockholder approval is not obtained within the applicable
period, any Options granted shall terminate retroactively as of the date they
were granted.
12. ADMINISTRATION OF THE PLAN.
12.1. PROCEDURE.
12.1.1. ADMINISTRATOR. The Plan shall be administered by (A) the
Board or (B) a committee designated by the Board which is constituted to satisfy
Applicable Laws. To the extent it is involved in such matters, any Committee
must comply with any applicable requirements (i) of Rule 16b-3 for exempt
acquisitions with respect to Option grants to Officers or Directors and (ii) for
the Options to qualify as "performance-based compensation" under Section 162(m)
with respect to Option grants "covered employees" within the meaning of Section
162(m). If permitted by the applicable rules, the Administrator may be different
bodies with respect to Directors, Officers who are not Directors, and Employees
who are neither Directors nor Officers.
12.1.2. REGULATION OF COMMITTEE. Once appointed, any Committee
shall serve in its designated capacity until otherwise directed by the Board.
The Board may increase the size of the Committee and appoint additional members,
remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws, and to the extent relevant, the rules for qualification as
"performance-based compensation" under Section 162(m) and/or exempt acquisitions
under Rule 16b-3.
12.2. POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan
and, in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion to take any action provided in this Plan, including without
limitation:
- to determine the Optionee, exercise price, number of shares of
Common Stock to be covered by, and terms and conditions of each
Option granted hereunder;
- to approve forms of Option Agreement;
- to modify or amend any Option (subject to Section 13), including
reducing the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the
Option was granted;
- to authorize any person to execute any instrument required to
effect the grant of an Option on behalf of the Company;
- to institute an Option Exchange Program;
- to construe and interpret the terms of the Plan;
- to prescribe, amend and rescind rules and regulations relating
to the Plan; and
- to make all other determinations deemed necessary or advisable
for administering the Plan.
12.3. EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options.
13. AMENDMENT AND TERMINATION OF THE PLAN.
5
<PAGE> 6
13.1. AMENDMENT AND TERMINATION. This Plan shall become effective upon
its adoption by the Board and continue in effect for a term of ten (10) years,
except that the Board may at any time amend, alter or suspend or terminate the
Plan.
13.2. SHAREHOLDER APPROVAL. The Company shall be required to obtain
shareholder approval of any Plan amendment only to the extent necessary and
desirable to comply with Rule 16b-3, with Section 422 or 162(m) of the Code or
with any Applicable Laws, including the requirements of any exchange or
quotation system on which the Common Stock is listed or quoted. Such shareholder
approval, if required, shall be obtained in such a manner and to such a degree
as is required by Applicable Law. If the Company purports to grant Options
covering more than the number of Shares which may be issued under the Plan
without additional shareholder approval, such Option shall be void (and the
Optionee will have no right against the Company) with respect to such excess
Optioned Stock, unless shareholder approval of an amendment sufficiently
increasing the number of Shares subject to the Plan is timely obtained in
accordance with this Section 13.2.
13.3. EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of an Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator. Any
such agreement must be in writing and signed by the Optionee and the Company.
14. RIGHTS OF PARTICIPANTS AND BENEFICIARIES. The Company shall pay all amounts
payable hereunder only to the Optionee or beneficiaries entitled thereto
pursuant to the Plan. The Company shall not be liable for the debts, contracts
or engagements of any Optionee or his or her beneficiaries, and rights to Shares
or cash payments under the Plan may not be taken in execution by attachment or
garnishment, or by any other legal or equitable proceeding, while in the hands
of the Company.
15. RESERVATION OF SHARES. During the term of this Plan, the Company will
reserve a sufficient number of Shares to satisfy the requirements of the Plan.
16. NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor any Option shall
confer upon an Optionee any right with respect to continuing the Optionee's
employment or consulting relationship with the Company, nor shall they interfere
in any way with the Optionee's right or the Company's right to terminate such
employment or consulting relationship at any time, with or without cause.
17. GOVERNING LAW. The Plan shall be governed by, and construed in accordance
with the laws of the State of Delaware (without giving effect to conflicts of
law principles).
18. DEFINITIONS. As used herein, the following definitions shall apply:
"ADMINISTRATOR" means the Board or any Committee administering the Plan
in accordance with Section 12.
"APPLICABLE LAWS" means the legal requirements relating to the
administration of stock option plans under state corporate and
securities laws and the Code.
"BOARD" means the Board of Directors of the Company.
6
<PAGE> 7
"CODE" means the Internal Revenue Code of 1986 and related regulations,
as amended.
"COMMITTEE" means any Committee appointed by the Board in accordance
with Section 12.
"COMMON STOCK" means the Common Stock, $.01 par value, of the Company.
"COMPANY" means Kings Road Entertainment, Inc.
"CONSULTANT" means any person, including an advisor, engaged by the
Company, a Parent or Subsidiary to render services and who is
compensated for such services.
"CONTINUOUS RELATIONSHIP" means that the employment or consulting
relationship or directorship is not interrupted or terminated by the
Company, any Parent or Subsidiary. Continuous Relationship shall not be
considered interrupted in the case of: (i) any leave of absence approved
by the Board, including sick leave, military leave, or any other
personal leave; provided, however, that for purposes of Incentive Stock
Options, any such leave may not exceed ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract
(including certain Company polices) or statute; or (ii) transfers
between locations of the Company or between the Company, its Parent, its
Subsidiaries or its successor. In the case of a consultant, the manner
of determining the duration of the "Continuous Relationship" may be set
out in the Option Agreement, which will then control.
"DIRECTOR" means a member of the Board.
"DISABILITY" means total and permanent disability as defined in Section
22(e)(3) of the Code.
"EMPLOYEE" means any person, including Officers and Directors, employed
by the Company or any Parent or Subsidiary. Neither service as a
Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without
limitation, the National Market of the National Association of
Securities Dealers, Inc. Automated Quotation ("NASDAQ") System,
the Fair Market Value of a Share of Common Stock shall be the
closing sales price for such stock (or the closing bid, if no
sales are reported) as quoted on such system or exchange (or the
exchange with the greatest volume of trading in Common Stock) on
the last market trading day prior to the day of determination,
as reported in the Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the National Market thereof) or is regularly quoted by
recognized securities dealers
7
<PAGE> 8
but selling prices are not reported, the Fair Market Value of a
Share of Common Stock shall be the mean between the high bid and
low asked prices for the Common Stock on the last market trading
day prior to the day of determination, as reported in the Wall
Street journal or such other source as the Administrator deems
reliable;
In the absence of any established market for the Common Stock, the Fair
Market Value shall be determined in good faith by the Administrator.
"INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
"NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
"OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
"OPTION" means a stock option granted pursuant to the Plan.
"OPTION AGREEMENT" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option
grant. Every Option Agreement is subject to the terms and conditions of
the Plan.
"OPTION EXCHANGE PROGRAM" means a plan under which outstanding options
are surrendered in exchange for options with a lower exercise price.
"OPTIONED STOCK" means the Common Stock subject to an Option.
"OPTIONEE" means an Employee, Director or Consultant who holds an
outstanding Option.
"PARENT" means a "parent corporation" of the Company, whether now or
hereafter existing, as defined in Section 424(e) of the Code.
"PLAN" means this 1998 Stock Option Plan.
"RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect
to the Plan.
"SECTION 162(m)" means Section 162(m) of the Code.
"SHARE" means a share of the Common Stock, as adjusted in accordance
with Section 10 of the Plan.
"SIGNIFICANT OWNER" means an Employee who, at the time an Incentive
Stock Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary.
"SUBSIDIARY" means a "subsidiary corporation" of the Company, whether
now or hereafter existing, as defined in Section 424(f) of the Code.
8
<PAGE> 9
"TERMINATION EVENT" means the determination of the Company that either
of the following has occurred: (i) any use or disclosure by an Optionee
of confidential information or trade secrets of the Company or any
Parent or Subsidiary in violation of any confidentiality,
non-competition or nondisclosure agreement by which the Optionee is
bound, or (ii) the termination of Optionee's Continuous Relationship for
cause as defined pursuant to applicable law, as a result of a breach of
Optionee's employment or consulting agreement, theft, fraud or
embezzlement, or any disclosure or use of confidential information or
trade secrets described in part (i) of this paragraph.
9
<PAGE> 1
EXHIBIT 10.2
GRANT OF NONQUALIFIED STOCK OPTION
----------------------------------
(EMPLOYEE)
To: Kenneth I. Aguado ("OPTIONEE")
From: Kings Road Entertainment, Inc.
As you probably know, Kings Road Entertainment, Inc. (our "COMPANY") has
adopted a 1998 Stock Option Plan (the "PLAN") under which the Company can grant
options to purchase shares of Company's Common Stock (the "COMMON STOCK"). We
are pleased to inform you that our Board of Directors (the "BOARD") has decided
to grant you an option under the Plan (your "OPTION").
Your Option will be governed by the Plan, the attached Standard Terms
and Conditions (the "TERMS") and the following specific provisions (which are
subject to adjustment under the Plan and the Terms):
The "DATE OF GRANT" for your Option for vesting purposes is: July 15,
1998.
The "EXPIRATION DATE" of your Option is: June 3, 2003.
The "NUMBER OF SHARES" covered by your Option is: 66,667.
The "EXERCISE PRICE" per share for your Option is: $1 7/32
VESTING. Your Option cannot be exercised before June 3, 1999. At any
time on or after June 3, 1999, but before June 3, 2000, the maximum number of
shares you may purchase or have purchased under this Option is fifty percent
(50%) of the Number of Shares; on or after June 3, 2000, you may purchase or
have purchased all of the Number of Shares. Of course, you can never exercise
the Option for more than the Number of Shares or after the Expiration Date (in
each case as adjusted under the Terms and the Plan).
1
<PAGE> 2
Please review the Plan and the Terms carefully, as they control your
rights under your Option. Then sign and return (and if you are married, have
your spouse sign) one copy of this letter.
We appreciate your continuing efforts on behalf of the Company.
Very truly yours,
Kings Road Entertainment, Inc.
/s/Christopher M. Trunkey
-------------------------------
By: Christopher Trunkey
Its: Chief Financial Officer
I hereby accept this Option and have reviewed the Plan and the Terms.
/s/Kenneth I. Aguado
-------------------------------
"Optionee"
I agree to be bound by all of the terms and conditions of the Option, including
those set forth in the Plan and the Terms.
Optionee's Spouse
/s/Kylene Aguado
-------------------------------
Name: Kylene Aguado
THE OPTION AND ANY SHARES ISSUABLE UNDER IT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 NOR REGISTERED OR QUALIFIED UNDER ANY
STATE SECURITIES LAWS. NO REGULATORY AGENCY HAS PASSED ON THE FAIRNESS
OF THE ISSUANCE OF THESE SECURITIES.
2
<PAGE> 3
STANDARD TERMS AND CONDITIONS
These Standard Terms and Conditions are attached to a letter (the "OPTION
LETTER") from Kings Road Entertainment, Inc. granting an Option to you, and are
intended to govern that Option. All capitalized terms not specifically defined
in these Standard Terms and Conditions have the meanings set forth in the Option
Letter or in the Company's 1998 Stock Option Plan.
1. OPTION. You may exercise the Option to buy all or any part of any
Number of Shares of Common Stock which are then exercisable at the Exercise
Price per share until the Expiration Date. This Option is not intended to
qualify as an "incentive stock option" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "CODE").
2. MANNER OF EXERCISE. This Option may be exercised only (i) during your
lifetime, by you; (ii) to the extent permitted by the Committee, by your spouse
if your spouse obtained the Option pursuant to a qualified domestic relations
order as defined by the Code or Title I of ERISA, or the rules thereunder
("QUALIFIED DOMESTIC RELATIONS ORDER"); and (iii) after your death, by your
transferees by will or the laws of descent or distribution. To exercise this
Option, you must provide the Company with (a) a written notice of exercise,
specifying the number of shares to be purchased and (b) the full purchase price
of the shares to be purchased solely (i) in cash or by check payable to the
order of the Company or (ii) by delivery of shares of Common Stock of the
Company previously purchased on the open market or acquired more than six months
previously through exercise of a stock option, and in your possession, valued at
fair market value. This Option may not be exercised for a fraction of a share
and no partial exercise of this Option may be for less than (a) one hundred
(100) shares or (b) the total number of shares then eligible for exercise, if
less than one hundred (100) shares.
3. FAIR MARKET VALUE OF COMMON STOCK. The fair market value of a share
of Common Stock shall be determined for purposes of this Option by reference to
the closing price on the principal stock exchange on which such shares are then
listed or, if the shares are not then listed on a stock exchange, by reference
to the closing price (if approved for quotation on the NASDAQ National Market)
or the mean between the bid and asked price (if other over-the-counter issue) of
a share as supplied by the National Association of Securities Dealers, Inc.
through NASDAQ (or its successor in function), in each case as reported by The
Wall Street Journal, for the business day immediately preceding the date on
which the option is exercised (or, if for any reason no such price is available,
in such other manner as the Committee may deem appropriate to reflect the then
fair market value thereof).
4. TERMINATION OF SERVICE; DEATH OR PERMANENT DISABILITY. The Expiration
Date is the earlier of (i) the date set out in the Option Letter or (ii) the
expiration of a period following the time you cease (whether voluntarily or
involuntarily) to be an employee of the Company or its subsidiaries, which
period will be (a) three (3) months if you ceased to be an employee for any
reason other than your death or
1
<PAGE> 4
"permanent disability" (within the meaning of Section 22(e)(3) of the Code), or
(b) twelve (12) months if you die or becomes "permanently disabled" while you
are an employee of the Company or one of its subsidiaries. Any options not
exercisable on the date that you cease to be an employee (whether voluntarily or
involuntarily) will be of no further force or effect. After the Expiration Date,
the Option will expire and be void and of no further force or effect.
5. SHARES TO BE ISSUED IN COMPLIANCE WITH APPLICABLE LAWS AND EXCHANGE
RULES. By accepting the Option, you represent and agree, for yourself and any
person entitled to exercise this Option, that none of the shares purchased on
exercise of the Option will be acquired with a view to any sale, transfer or
distribution in violation of the Securities Act of 1933, as amended (the
"SECURITIES ACT"), and the rules and regulations promulgated thereunder, any
applicable state "blue sky" laws or any applicable foreign laws. If required by
the Committee at the time the Option is exercised, the person entitled to
exercise the Option shall furnish evidence satisfactory to the Company to such
effect (including a written representation and an indemnification of the Company
in the event of any violation of any applicable laws). The Company does not have
to issue any shares on the exercise of this Option if there has not been full
compliance with all applicable requirements of the Securities Act (whether by
registration or satisfaction of exemption conditions), all applicable listing
requirements of any national securities exchange on which shares of the same
class are then listed and any other requirements of law or of any regulatory
bodies having jurisdiction over such issuance.
6. WITHHOLDING OF TAXES. Upon the exercise of this Option, the Company
may require the person entitled to exercise it to pay the Company the amount of
any taxes which the Company is required to withhold with respect to the
exercise.
7. NO ASSIGNMENT OR TRANSFER. This Option and all other rights and
privileges granted hereby[, and any securities issued on exercise (the "STOCK")]
shall not be transferred, either voluntarily or by operation of law except (i)
by will or the laws of descent and distribution or (ii) pursuant to a Qualified
Domestic Relations Order to the extent permitted by the Committee. If there is
any other attempt to transfer this Option or any other right or privilege
granted hereby, this Option and all rights and privileges granted hereby shall
immediately become null and void and be of no further force or effect.
8. ADJUSTMENT FOR REORGANIZATIONS, STOCK SPLITS, ETC. If the outstanding
shares of Common Stock of the Company (or any other class of shares or
securities which shall have become issuable upon the exercise of this Option
pursuant to this sentence) are increased or decreased or changed into or
exchanged for a different number or kind of shares or securities of the Company
through reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split or other similar transaction, an appropriate
and proportionate adjustment shall be made in the Number of Shares, without
change in the aggregate purchase price applicable to the unexercised portion of
this Option, but with a corresponding adjustment in the price for each share or
other unit of any security covered by this Option.
2
<PAGE> 5
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon a sale of substantially all the property or more than fifty percent
(50%) of the then outstanding stock of the Company to another corporation, this
Option shall terminate; provided, however, that notwithstanding the foregoing,
the Committee shall provide in writing in connection with such transaction for
the appropriate satisfaction of this Option by one or more of the following
alternatives (separately or in combinations): (i) for the Option to become
immediately exercisable notwithstanding the vesting provisions; (ii) for the
assumption by the successor corporation of this Option or the substitution by
such corporation therefor of a new option covering the stock of the successor
corporation or its subsidiaries with appropriate adjustments as to the number
and kind of shares and prices; (iii) for the continuance of the Plan by such
successor corporation in which event the Plan and this Option shall continue in
the manner and under the terms so provided; or (iv) for the payment in cash or
stock in lieu of and in complete satisfaction of this Option.
Adjustments under this Section 8 will be made by the Committee and its
determination as to what adjustments to make will be final, binding and
conclusive. No fractional shares of stock shall be issued under this Option on
any such adjustment.
9. PARTICIPATION IN OTHER COMPANY PLANS. The grant of this Option will
not affect any right you might otherwise have to participate in and receive
benefits under the then current provisions of any pension, insurance, or profit
sharing program of the Company or of any subsidiary of the Company.
10. NOT AN EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Option is to
be construed as an agreement, express or implied, by the Company or any of its
subsidiaries to employ you or contract for your services, nor will it restrict
the Company's or such subsidiary's right to discharge you or cease contracting
for your services or to modify, extend or otherwise affect in any manner
whatsoever, the terms of any employment agreement or contract for services which
may exist between you and the Company or any of its subsidiaries.
11. NO RIGHTS AS A STOCKHOLDER UNTIL ISSUANCE OF STOCK CERTIFICATE.
Neither you nor any other person legally entitled to exercise this Option will
be entitled to any of the rights or privileges of a stockholder of the Company
with respect to any shares issuable upon any exercise of this Option unless and
until a certificate or certificates representing the shares shall have been
actually issued and delivered.
12. AGREEMENT SUBJECT TO STOCK OPTION PLAN. This Option is subject to,
and the Company and you agree to be bound by, all of the terms and conditions of
the Plan, as it may be amended from time to time in accordance with its terms.
No amendment to the Plan will adversely affect your rights under this Option in
a material manner without your prior written consent.
3
<PAGE> 6
13. GOVERNING LAW. The interpretation, performance and enforcement of
this Agreement shall be governed by the internal substantive laws of the State
of Delaware, without regard to the conflict of laws provisions of that or any
other State. The Option can only be amended in a writing executed by a duly
authorized Executive Officer of the Company.
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR THE YEAR ENDED APRIL 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<CASH> 2,658,500
<SECURITIES> 0
<RECEIVABLES> 383,463
<ALLOWANCES> (10,000)
<INVENTORY> 300,673
<CURRENT-ASSETS> 3,332,636
<PP&E> 233,068
<DEPRECIATION> (218,583)
<TOTAL-ASSETS> 3,397,462
<CURRENT-LIABILITIES> 248,167
<BONDS> 0
0
0
<COMMON> 21,136,318
<OTHER-SE> (17,996,623)
<TOTAL-LIABILITY-AND-EQUITY> 3,397,462
<SALES> 1,538,292
<TOTAL-REVENUES> 1,698,094
<CGS> 584,333
<TOTAL-COSTS> 1,653,873
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 44,221
<INCOME-TAX> 5,404
<INCOME-CONTINUING> 38,817
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,817
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
